CTC,
Perhaps I'm not clear, but it does not appear generally true
that the results of the two methods would be the same. In
this case they scale similarly, but only because the market
caps of the two companies are similar, and the LT debt is
a secondary consideration. E.G.
Entity WACC: Cost
AOL: Equity MV: 127B 19.18%
LT Debt: 341M 4.7%
TWX: EQuity MV: 107B 13.3%
LT Debt: 14B 4.7%
Entity= 15.8%
Result, the merged entity reduced aol's wacc from 19.17% to
15.8%!
At any rate, Pittman, Case & Levin have stated that a 30%
bottom line growth will result. From my estimates of
growth of the two companies independent of each other, for
example
Year 6: AOL: CF = 10B TWX: CF=5.79B
Last year's CF numbers were:
AOL: CF = 0.792B TWX: CF=3.120B
leads to an annualized growth of ~28%/yr. My point is that I
believe 28%/yr growth is in the bag and does not include
any synergies which I believe are bound to happen.
Furthermore, from a dcf point of view, ANY synergies
resulting in an increase in CF for year 6 over the
projected CFs will provide proof that the merger made sense
economically.
As far as why the market caps of the companies have
declined, I don't think it is as much as a vote against the
realization of the benefits of the combination, but rather
as a jerk reaction to the decline in topline growth that
will inevitably occur, i.e. shareholder turnover from the
"momo" crowd to the lt growth investor. But perhaps I'm not
looking at the situation in the right light... Regardless, an internet trading at only $10 above intrinsic value is
pretty tempting, especially in this market.
tci |
